EPR Properties

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

EPR Properties is a real estate investment trust (REIT) specializing in experiential properties such as movie theaters, ski resorts, and attractions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

EPR Properties operates as a REIT focusing on experiential real estate. Their portfolio includes properties within the following sectors:

  • Experiential: This segment primarily includes entertainment venues like movie theaters, family entertainment centers, attractions, and experiential lodging.
  • Education: This segment focuses on private schools and early childhood education centers.
  • Other: This segment mainly comprises ground leases, a small category that has a significant influence on the value of the company.

The company’s revenues are primarily derived from leases on these properties, with a portion coming from percentage rent where rent is tied to performance.

The experiential real estate industry is marked by:

  • Evolving Consumer Preferences: The type of entertainment and experience that consumers find appealing is in constant flux, requiring properties to adapt. Movie theaters, for instance, have to compete with streaming services.
  • Technological Impact: Advances in entertainment technology, such as streaming and at home entertainment has affected the demand for certain property types like movie theaters.
  • Post-Pandemic Landscape: While certain segments like gaming have rebounded, sectors like movie theaters are still recovering from the pandemic’s impact, which affected many companies in the industry.

Competitive Landscape

The competitive landscape for EPR is varied.

  • Real Estate Developers and Operators: Competing with other real estate operators for development rights, or tenant contracts, especially for high demand locations.
  • Industry-Specific Competitors: Each industry sector that EPR operates within has competing businesses which are highly specialized, for example, REITs that only hold entertainment properties will compete more aggressively on those kinds of leases with higher premiums.
  • Financing: Capital structure is very important, a REIT has to have constant access to financing in order to survive, since large capital expenses are required for continued maintenance of properties and acquisitions.

What Makes EPR Different

EPR stands out due to their focus on experiential properties.

Unlike REITs that invest in apartments, office buildings, warehouses, and retail, which are often considered standard, EPR has decided to focus on “experiences” and these unique assets provide both opportunities and risks. This focus can be beneficial if well-executed, but can severely hurt performance when some industries decline.

  • Deep Industry Knowledge: The management has a long and deep knowledge in understanding and managing those kinds of unique real estate assets.
  • Long Term Focus: The leases with EPR’s clients tend to be long term. This gives the REIT the stability it needs in uncertain economic conditions.
  • Diversified Portfolio: Within “experiential” properties, EPR is diversified across various industries like movie theatres, golf, ski resorts, and others. This reduces the risk of over-exposure to one specific industry, providing the REIT and its investors with some cushion from industry specific volatility.

Financials

  • Revenue Streams: The company generates revenue from rental income from its various properties and a small portion from percentage rent, which is based on its tenants’ performance.
  • Growth and ROIC: The emphasis is on return on invested capital (ROIC) and growth, while those factors are indeed important, recent news regarding the company points to a decline in some of these industries, and thus, the company’s returns on invested capital.
  • Debt: The company has considerable debt load, with a net debt-to-EBITDA ratio of around 5.1x, with its ability to pay down debt and increase equity will greatly influence its future success. This ratio is around 5x as of the latest reports from the company.
  • Guidance and Targets: The company provided guidance indicating that there were significant improvements in net income, adjusted EBITDA, and FFO per share for the year. The management noted that they are confident in their strategy for value creation, however, it still remains to be seen if they can hit those targets.

Moat Analysis

EPR Properties has a narrow moat, rating a 2/5, mainly due to the following reasons:

  • Unique Properties: The REIT is focused on a specific niche - experiential real estate, which includes movie theaters, resorts, and family entertainment. There are specialized requirements that must be met for those kind of properties, which makes it harder for new entrants to enter this niche.
  • Location: The REIT’s success is dependent on the placement of assets. While it does have the ability to use local approvals and licenses to secure the area, the location might not always be the best, which might increase the chances of a competitor or substitute gaining market share.
  • Scale: The scale is not necessarily an advantage for EPR, since it has to continue to invest in its existing properties to compete with others. Smaller competitors might be able to offer unique and new properties in new locations at a much lower cost by utilizing different financial and capital structures.

However, the moat is narrow and can be easily disrupted by changes in the industry, and changes in consumer trends. While having long term leases might give some stability, it doesn’t guarantee that these leases can be renewed.

Risks to the Moat and Business Resilience

There are a few risks to consider regarding EPR’s business. These include:

  • Industry Disruption: The ongoing evolution of the entertainment and education sectors could disrupt the business model of its tenants and, consequently, reduce EPR’s revenues. The company has to be careful of the long term trends in the industry it operates in.
  • High Leverage: The high debt load, at 5x of its EBITDA, makes the company susceptible to economic downturns and reduced financial performance of its tenants, which would significantly reduce profitability and cash flow of the REIT.
  • High Interest Rates: The company’s debt is susceptible to increased interest rates, which may affect profitability and ability to service its debt. Interest rates are going to rise even further in the next few months, so the debt load could potentially become very concerning if the company can’t generate the cash it needs to repay.
  • Acquisition Risks: The company does acquisitions for the purpose of diversification and scale, however, there is no guarantee that these acquisitions will be successful or will not end up destroying value, as with many merger and acquisition deals.
  • Tenant Reliance: The company’s financial health is tied to the financial health of its tenants. If key tenants fall into bankruptcy or have a bad period, it could negatively impact the REITs financial results.
  • Asset Concentration: High concentration of properties in one location can also be a risk. While there might be high returns, any drastic economic or regional change would severely hurt the performance of the company.
  • Inflation: While there have been indications of “inflation” not hitting as much of the market as we expected, it is still a concern as it can lead to increase in operating expenses. The company might not be able to increase leases with a pace higher than the increase of inflation.

The management has stated that they are confident that inflation will not significantly reduce growth of their properties, however, history has shown that high inflation does effect real returns in the market for a prolonged amount of time.

Understandability

The business model of EPR properties is relatively simple on the surface, a REIT that rents out experiential, education, and limited other properties. However, to be successful, they must possess significant insight into the industries in which they are renting the properties. This complexity, along with the nature of REIT accounting, makes it harder to understand the intricacies of the business.

Thus the REIT gets an understandability rating of 2/5.

Balance Sheet Health

The company has a considerable amount of debt with a net debt-to-EBITDA ratio of over 5x.

While they have shown some positive developments regarding profitability, the debt level presents some concern. They are, however, actively deleveraging their capital structure. They are also in line with their debt covenants. Given those factors, they get a balance sheet health score of 3/5.